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Real Estate Investor Tips

The Dangers of Turn-Key Rental Property & 10 Ways to Protect Yourself

Approximate Reading Time: 7 Minutes

Learn > Investor Tips > Dangers of Turn-Key Rental Property & 10 Ways to Protect Yourself

Published: July 25th, 2016

More and more sellers are throwing out the term “turn-key rental property” in hopes they can attract out-of-state buyers. But what do they really mean by ‘turn-key’?

I heard a fellow podcaster state recently that all you have to do to provide turn-key property is buy a home, get it rented, put it under management and voila! You can flip “turn-key” property at retail pricing to eager out-of-state investors!

This is certainly not our definition of turn-key. Unfortunately, turn-key means absolutely nothing anymore.

Turn-Key Misconceptions

Uneducated buyers assume turn-key means that you don’t have to do a thing. The belief (or false hope) is that someone else does the buying, renovating, leasing and management of your rental property, and all you have to do is deposit rent checks.

Unfortunately, most of these misinformed investors end up writing checks and making few deposits.

The problem is that most people trust what other people tell them. They believe the marketing message.

For example, have you ever bought Fiji water? The marketing is beautiful and makes you feel like you’re drinking right out of a waterfall on a tropical island. But the Cleveland Water Department ran tests comparing Fiji Water to Cleveland tap water and found arsenic, human feces and other contaminants in the Fiji Water.

False advertising is often used to market “turn-key properties.”

At Real Wealth Network, we are constantly bombarded with companies who want to come speak at our events. Before they can do so, they must be thoroughly vetted to determine if their version of “turn-key” is the same as ours.

I noticed one company was especially savvy at internet marketing. From the looks of their marketing, they appeared to have a quite an impressive system in place so I decided to pay a visit.

What I found was the owners were very young – in their 20’s and had only a couple years experience in real estate. When they showed me their available properties, I thought we were walking through their newly acquired homes just out of foreclosure and in pre-renovation phase.

You can imagine my horror when they proudly told me these were their turn-key homes. It appeared that no renovation had been done at all. In fact, there was not even a handle on the very old, rusty oven.

I told them their properties did not meet our strict criteria, and they quickly replied, “That’s OK. We’ve already sold these to out-of-state investors. We have a wait list.”

I asked if the buyer’s ever came to see what they were buying. They said “Never”.

These kids were expert internet marketers. They were not turn-key rental operators. I was amazed at how trusting their buyers must have been to unknowingly purchase such garbage.

The 10 Most Common Signs of Dangerous Turn-Key Rental Operators

Real estate investing is really not hard to get right – IF you use the protective measures available to you like property inspections, appraisals and rent verifications.

When it comes to working with a turn-key property company, here are just a few of the things we look for at the outset when vetting teams.

1. Inexperienced operators

If they don’t have a solid track record, they will be practicing and learning with YOUR money.

2. Not Walking the Talk

If they don’t own a portfolio of rental property, they won’t really know first-hand what it takes to succeed.

3. Lone rangers

If they don’t have a team to support them, you won’t be supported either – especially if anything happens to them.

4. Lacking systems

If they aren’t organized with the right software and systems, they will get overwhelmed and be unable to serve you over the long term.

5. They operate in the ‘hood

C- properties can look real good on paper, but reality is a different story. Stay away from properties under $50k because they tend to be high crime, high vandalism areas.

6. Shoddy renovations

If they are not fully renovating the property, they are just making a profit and leaving you with repairs. Demand that all plumbing, roofing, HVAC, boilers, foundations and electrical be upgraded to code – and get inspections to verify.

7. Rental or vacancy guarantees

There are no guarantees in real estate and a rental guarantee won’t be necessary if you buy right. Most operators who make guarantees have padded the price of the property at the outset. Make sure you really understand market rents.

8. Over-market pricing

Many turn-key operators sell their properties above market value. Out-of-state investors from high-priced markets are targets because they don’t understand local values and think everything is a deal because it’s so much cheaper.

9. Inexperienced property management

Many turn-key operators choose to do their own property management. If they do not have at least 2 years experience with lower than average vacancy rates – don’t use them or you will be part of their learning curve!

10. A history of fraud

It is astounding how many scam artists are attracted to the real estate business. It’s worse than used car salesmen! This is an easy fix – get back ground checks.

We’ve already done this work. Use our research.

At Real Wealth Network, we have vetted dozens of so-called “turn-key” operators and are happy to share our research with our members. Basic membership is free.

If you’re a member you can meet with one of our investment counselors to get their feedback on property you are considering buying. We have the information you need to make the right decision.

We are also happy to provide you with a list of truly turn-key companies who have rave reviews from our 16,000 members. These companies find properties at wholesale prices in good neighborhoods near jobs. They then renovate the properties to like-new condition. They screen tenants to very strict standards and offer ongoing, excellent property management in place.

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Author

Kathy Fettke

Kathy Fettke

Kathy Fettke is the Co-Founder and Co-CEO of Real Wealth Network. She is passionate about researching and then sharing the most important information about real estate, market cycles and the economy. Author of the #1 best-seller, Retire Rich with Rentals, Kathy is a frequent guest expert on such media as CNN, CNBC, Fox News, NPR and CBS MarketWatch.

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